The Recurly Payment Gateway

We are proud to announce that we have built the first payment gateway designed to support recurring billing as the primary use-case. This means that we access rich error messages from the payment processor to optimize many different common credit card decline types. As we have communicated recently, credit card declines lead to painful customer churn, which is one of the most important and sensitive metrics for any subscription business.

During beta testing, our trials demonstrated a range of 10-27% incremental lift in recovered invoices for a variety of different kinds of businesses (Both B2B and B2C).

The new Recurly Payment Gateway is now bundled with the Recurly service. In addition, we are adding critical customer retention reports so that our customers can track the long term trends of their customers by cohort month, and by subscription plan.

New Recurly Pricing

As of today’s announcement, Recurly’s pricing structure has also changed.

We now charge a simple 1.25% and $0.10 per transaction per month, with a $69 monthly minimum (as there has been for some time).

Grandfathered Pricing

Existing Recurly ‘live production’ customers will remain on their original pricing unless they choose to take advantage of the Recurly Payment Gateway, or any of our premium features – such as Retention Reports, Salesforce Integration, PayPal Payments or Multi-Currency support. We will continue to support other payment gateways to offer the broadest choice to our customers, but the cost of other payment gateways are not inclusive with our new pricing.

No Merchant Account, No Problem

All you need to take advantage of the Recurly service is your own merchant bank account. If you don’t have one already, we can help you apply and get set up with an account offering extremely competitive rates.

We’re excited about our role in helping companies to optimize their subscriber renewal rates. Our ambition is to make the Recurly service a distinct competitive advantage for our customers.

If you have any questions about the Recurly service, or the Recurly Payment Gateway, please contact sales@recurly.com.

We can help.

Cheers,
The Recurly Team.

For the purposes here, we’ll avoid the finance theory and focus on the general concepts of subscription economics that matter most to every company offering products, applications or services on a subscription basis.  In order to grow any business, it is of first-order importance to first know what your customers are worth – at all times.

Early customer retention rates decay as lower quality users are acquired

Concept 1 – Understand Customer Lifetime Value

A company offering a service for $19.95 per month with healthy customer retention rates, and an expected Lifetime Value (LTV) of 24 months can expect their customers to deliver $479 in revenue on average. (The green line indicates the slope of retention curves and gives an approximation of a 24 month expected timeline).

At this stage, many companies commit this expected customer LTV to memory, and want to ‘stomp on the gas’ to acquire as many customers as possible.

[For riveting guidance on appropriate ratios of customer acquisition costs to LTV for SaaS companies, see David Skok's post on SaaS metrics here]

Concept II – Understand Customer Retention At ALL Times

Customer retention becomes a very sensitive variable, comprising the “T” in Lifetime Value (LTV). In the chart above, we present anonymized, actual data from a Recurly customer that started with very healthy customer economics. Strong retention rates indicated an expected customer lifetime of 24 months and average customer revenue of $479 over their lifetime. As marketing programs ramped up, channel partnerships were launched, and customers were acquired aggressively to fuel growth. Over this same period, the product did not change substantially, but the average ‘quality’ of customers declined, and so did customer retention.

Frequent Assessment of Customer Economics is Vital For Success

The example company here demonstrates a very common cycle which is experienced when customer economics are not assessed on a frequent basis. Better yet, they should be assessed on a per channel, per partner, per campaign basis in order to prune the ‘losers’ and add more profitable marketing programs in a repeatable fashion.  It is rare for companies to have resources and infrastructure dedicated to understanding customer economics over ongoing periods of time until they have hundreds of employees.

Much of the recent speculation over the likelihood of Groupon’s (NASDAQ: GRPN) success centers singularly around this concept.  Their S-1 Filing indicates that they spent $179MM in Q1 of 2011, acquiring 33 MM customers at approximately $5.42 per customer. They surely have teams of people monitoring the value of their customers over time, and while customer acquisition costs are important, customer retention rates ultimately determine whether your business is growing profitably or not.

If your business offers a product, application or service on a subscription-basis and you’d like to have better visibility into your customer economics, have a conversation with us. Contact sales@recurly.com

Recurly can help.

Multi-Currency Goes Hand-In-Hand with International Language Support

Recurly also supports 12 languages, (Chinese, Danish, Dutch, German, English, English (U.K.), French, Hindi, Japanese, Portuguese, Russian, Turkish) so that your customers’ experience will be defined by their browser settings and location. Recurly will present the appropriate language to your end customer so that they can not only pay in their preferred currency, but you will also speak to them in their native language.

Multi-Gateway Support and Intelligent Payment Routing

In order for companies to support multiple currencies, it is a common to require multiple payment gateways as well. Recurly supports multiple payment gateways per account, and our customers can easily configure routing rules so that transactions can be routed to the appropriate payment gateway according to the currency specified in the transaction.

See, it’s all coming together nicely!

If you have any questions about this enterprise feature, please contact sales@recurly.com.

Cheers,
-The Recurly Team

If you had to pause and ponder the answer, or if you felt that it was everybody’s responsibility…then you’re not alone.

When I was with eBay, it was far easier for marketing teams to focus on acquiring new customers than to identify an effective means to address customer churn. Customer churn is a ‘wet bar of soap’ problem, and therefore always seems to be ‘somebody else’s responsibility’, because it is a difficult problem to attack.

Consider these factoids:

Most Executives Have No Idea What Drives Their Churn

Identifying the drivers of customer churn can be extremely difficult. Additionally, customer acquisition is infinitely more fun for marketers than retention marketing. [It is much more interesting and profitable for Ad Agencies to focus on driving brand awareness, positioning and expanding appeal than driving retention metrics.]

In our business of providing subscription billing, we frequently discuss the topic of customer retention and churn with our customers. Through this, we’ve learned that executives generally have a clear sense for their own customer retention and churn metrics, but they have very little idea what is driving it. Most will cite Net Promoter Scores (NPS), or customer satisfaction rates as the broad and diffuse driver of customer churn, but they have difficulty pinning down any single reason why their customers leave them.

Subscription Businesses – Plug That Leaky Bucket!

For subscription businesses, customer retention is driven by renewal rates. Improving renewal rates extends the ‘T’ in Lifetime Value (LTV), and this is an extremely sensitive variable in the overall calculation. The enemy of the renewal rate is your churn rate.

Q: What drives customer churn in subscription-based businesses?

A: [Assuming your product/service delivers good value] If you are a subscription-based business, the most immediately addressable, passive culprit is: Credit card errors and declines.

What Can You Do?

Examine Your Credit Card Decline Logs!

Many commonly experienced credit card errors can be successfully remediated. Results will vary depending on your payment gateway/payment processor combination, but by beginning with your credit card error logs, and working backwards towards the solve, you will find that you can dramatically reduce your customer churn with proper error and decline remediation. However, if your customer credit cards are stored within a payment gateway, you will be limited in your ability to remediate many common errors.

If you have questions about Recurly’s standard error handling practices, and how we might help your business reduce customer churn, please contact us.

Email sales ‘at’ recurly.com or call 415-800-2042.

Step One: Define your own billing requirements – what are your needs?

Here is a punch-list of items for you to consider:

Be clear on the structure of your subscription offering:

• How many subscription plans will you be offering? One plan or multiple plans?
• What is the billing cycle interval? (Monthly, Quarterly, Bi-Annual, Annual?)
• Will you offer free trials?
• Will your subscriptions auto-renew, or terminate on some date?
• Will your business require one-time payments?
• Do you need optional items to be added? (Add-ons)

Define how you will you price your subscriptions:

• Are you charging a flat fee per month?
• Do you have a variable pricing component? (Requiring ‘metered billing’)
• Will your pricing change based on usage? (Tiered pricing?)

Communication Requirements:

• How and when would you like to communicate with your customers?
• What are your data integration needs? CRM? Finance/Accounting? Mailing lists?
• How important is it for your billing + subscriber status to be synced up with your application?

EXPERT TIP:

Step Two: Items to look for in a subscription billing provider

Think about your businesses end-goals and total cost of ownership (TCO).

Most subscription-based businesses ultimately care about the following:

• Minimizing Customer Churn
• Maximizing Lifetime Customer Value (LTV)
• Maximizing Return on Investment (ROI) – which means minimizing TCO

You cannot achieve these goals if your billing platform doesn’t support key daily functions efficiently. Your billing system should be a valuable tool, not an impediment.

PCI Compliance:

If your vendor is not PCI Level 1 compliant, ‘do not pass go’. You cannot afford to store your customer credit cards with a company that is not invested enough to achieve PCI Level 1 certification.

Functional capabilities:

Daily administration (This is frequently overlooked):

• Is there a Customer Support console? If so, is it functional? Intuitive to use?
• Search / Sort / Filter – How easy is it to find accounts?
• Account changes – How easy is it to make a manual override?
  • Upgrades/Downgrades
  • Pro-ration of accounting? Is this automated or manual?

Really push on this. Some very expensive vendors require 30+ clicks to make simple manual changes to subscriptions.

Customer Invoicing

Automated – Are customer invoices delivered automatically?

Manual – Can you create invoices manually?

Credits and Refunds (Both whole and partial credits)

This is key functionality to keep your customers happy. It needs to be incredibly easy to issue a credit or a refund.

Transaction History

It is always critical to be able to call up the transaction history for an account in order to provide customer support.

Marketing Support: Coupon and Discount code management

Your business might require coupons or discounts for promotional purposes, or channel discounts. Coupon and discount support needs to be seamless and easy to manage. Not all systems are created equal.

• How easy is it to set up a new coupon or discount code? (60 sec. max).
• Can you manually apply coupons or discounts to an account?
• How flexible is the coupon/discount functionality?
  • One-time, Limited Time, Evergreen applications
  • Percentage discounts vs. absolute dollar off?
  • Expiration date management?
  • Applies to specific billing plans?
  • Limited count offers? “First 500 subscribers receive…”

Error Handling: Credit Card Error and Decline Management

Like it or not, your recurring payments will encounter errors. This is a given when you are charging credit cards on a recurring basis. Cards will be declined for a variety of reasons, and from a variety of sources.

Q: At the highest level, you need to know whether your provider stores credit cards and tokenizes cards in their own environment.

A: If the answer is no, then that vendor cannot remediate credit card errors and declines on your behalf. It’s that simple.

Reporting: Data or Business Insights?

What kind or reporting capabilities do they provide?

Revenue by period, Revenue by plan, Monthly Recurring Revenue (MRR), Cohort analysis, Credit card decline rates, Lifetime value analysis?

What is the support model? Look at support forums and evaluate quality and timeliness of responses.

Step Three: Evaluate Total Cost of Ownership

Total cost of ownership is often underestimated.

It breaks down simply to the following four buckets:

1. Cost of Integration (often a hidden cost – Recurly takes days rather than months)
2. Cost of Administration
3. Cost of Customer Churn and Non-renewing subscribers (another hidden cost)
4. Marginal Cost of Billing Service

Is your billing system working for you? Or are you working for your billing system?

Expert Tip:

Most evaluations of subscription billing providers erroneously focus only on #4. Total Cost of Ownership surprises most companies. Ease of integration, ease of use and ease of administration can be very costly. (Employee resignations have occurred over frustration with complex billing systems)

Pricing Gotchas

Be clear on Setup Fees, Cancellation Fees, Extra charges.

(Recurly does not charge for any of these)

Network Availability

Don’t be shy. You’re the customer.

Ask for third party auditing of network uptime and availability reports. [Recurly has proudly maintained 99.994% uptime in 2011]

Final Thoughts:

Expensive ≠ Better

Your subscription billing system should work for you, not the other way around. Paying more for an expensive enterprise ‘solution’ does NOT mean that you get more value.

If you consider the elements from this guide, you will not only be much happier with your ultimate decision, but your business will have a greater chance of success.

If you would like to learn more about Recurly’s capabilities, please contact sales@recurly.com

Recurly handles declined cards differently depending on when they occur: during signup or at renewal. Offering the customer guidance for every unique error code at signup can dramatically improve the customer signup experience. At renewal, it’s also very important to properly categorize these errors and treat them appropriately to increase customer retention, which leads to greater revenue over the lifetime of your customers.

The errors returned by your gateway will vary, but can be broken down into a few common categories. For the curious, Recurly distinctly handles over 60 error types. Generally, these fall into 5 categories within our system:

• Soft Decline – The card number is probably valid but was denied by the issuing bank. If a soft decline occurs on a renewal, retrying the card at a later date may work.
• Hard Decline – The credit card was declined by the issuing bank or card processor. Retrying the card number will never work. If a hard decline occurs on a renewal, retrying the card at a later date will never work.
• Fraud Prevention – The transaction was prevented because the transaction could be fraudulent.
• Communication – There was an issue communicating with the payment gateway, the gateway was too busy, or the gateway did not return a response in time.
• Misconfiguration or Merchant Error – The customer’s card type is not accepted by the merchant or gateway, the currency unit is bad, or the gateway credentials are no longer valid. These issues are fixable or avoidable, so they are surfaced to Recurly support.

We regularly review all the failed transactions going through Recurly to proactively reach out to merchants and help them fix any issues. Next week, we’re rolling out new code to proactively notify us about errors from the misconfiguration category. It’s our mission to handle all these complexities so you can focus on developing your service.

Step One: Create your subscription plans

Once you sign up, you will be asked to create your first subscription plan. Most businesses like to create more than one plan so that their users have more choice in terms of features and pricing. Multiple subscription plans also create a nice ‘migration path’ for your users to upgrade once they’ve tried out your service.

Here is a 60 second video demonstrating how easy it is to create your subscription plans:

Step Two: Set up your payment gateway

In order to process payments for your business, you will need two things:

1) Merchant Account
2) Payment Gateway
Or..
3) Some providers act as BOTH the Merchant Bank and Gateway
a. Intuit Payment Solutions (allows automatic integration with QuickBooks)
b. PayPal (Website Payment Pro)

Step Three: Use Recurly’s Hosted Payment Pages to accept payments

Now that you’ve created subscription plan(s), you have checkout pages (we call them Hosted Payment Pages) for each plan. Your users can access these pages to easily sign up for your service!

Go Live: That’s It! You’re ready to LAUNCH your subscription business.

We’re glad you asked – because this could save you many hours of development, and many curse words before learning the hard way – on your own precious company’s dime.

Every payment gateway is designed to handle one-time transactions. Some gateways like PayPal and Authorize.Net  offer recurring billing or subscription billing functionality, and while they generally work for simple recurring billing integrations, we’d like to explain what you should expect to receive by signing up with Recurly rather than integrating directly with your payment gateway.

Recurly is designed as a complete billing system for recurring billing. This means that we have put careful thought and consideration into the most common pain-points experienced by business owners handling the day-to-day billing and related customer support issues that can come along with subscription billing.

Consider this – Unlike payment gateway solutions, Recurly lets you handle all of the following scenarios elegantly:

1. Customers upgrade and downgrade between plans easily – Recurly handles proration and customer communications
2. Billing cycle changes (e.g. customer signs up for monthly plan and elects to change to yearly plan)
3. Easily issue customer credits towards future service
4. Create email invoices
5. Easily process refunds
6. Process one-time transactions
7. Customizable hosted payment pages for customers to subscribe & update their billing info
8. Provide billing support with an account management console for your customer support
9. Easily change payment gateways without any business interruption. Recurly stores your data safely and securely.
10. Keep your own systems easily in sync with secure XML notifications and/or emails.

Things To Consider Before Building Homegrown Billing Solution

Here are some common pitfalls when estimating the work required to build your own solution:

Customer Upgrades and Downgrades

Most businesses prefer to offer multiple subscription plans. It’s good practice to create a ‘migration path’ from an easy, no risk trial to the plan with the plan with the maximum expected lifetime value. This is great business practice, but the billing intricacies are non-trivial.

Let’s start with proration, it means prorating the current month’s charge against the current payment — this can get complicated quickly once you also factor in trial periods. If your customers decide it’s too much and want to downgrade, you might want to wait until the end of the current billing cycle — now you’re tracking state. These simple tasks can take months to build on your own; Recurly gracefully handles these situations with a single API call.

Failed Payments

Recurring billing APIs typically leave you in the dark when a payment fails. On average, 5-10% of your payments will fail every month due to changed credit card numbers, expiration dates, and accounts overdrawn.  (The longer the billing cycle, the higher the failure rate.) As part of offering a subscription service, you need to follow up with these subscribers to keep their billing information accurate. Recurly makes it easy to follow up with your past due accounts and gracefully collect their new billing info which eliminates costly customer service overhead.

Account Management

Subscriptions come with customer support requirements. This is a commonly underestimated cost, and Recurly makes it much easier for your company to manage without building out expensive custom solutions. Your customer service dept. can view subscription information, issue credits & refunds, and more. Any change made in Recurly will be pushed back to your web application with our Push Notifications and REST API.

Employee Retention

We like the business we’re in, but we’ve never claimed that billing is sexy.  It turns out that many of our customers have come to us AFTER having built homegrown subscription billing solutions. Beyond the expected engineering and customer service challenges outlined above, the net effect on an organization is low employee retention. Engineers typically want to work on the company’s core product. After spending 3-6 months in the “billing department”, many engineers naturally seek new employment.
When you outsource your subscription billing to Recurly, you’ll dramatically reduce your total cost of ownership related to each of these areas.

• Engineering Development Time
• Ongoing Engineering Management and Maintenance
• Customer Service and Support
• Recruiting and Training to get new (replacement) employees up to speed.

Sign up for Recurly.

It’s free to sign-up, and priced to pay-as-you-go. Your business will thank you.

Ask an accountant if they like to see a steady stream of revenue coming in every single day, or if they prefer giant monthly lump sums. The answer is that a constant revenue stream is much better for cash flow. From the user’s perspective, they would rather see round numbers like $99 on their credit card statement instead of prorated charges like $54.16 that look unfamiliar.

What happens if the user decides to cancel in the first month of service? If you prorate your monthly dues and the user decides not to renew before the month is up, you’ve lost some additional revenue that the subscriber already agreed to pay because you did not charge for the full term.

From the developer’s perspective, it’s also much easier to deal with whole subscription terms than it is to worry about the shortened, pro-rated term lengths. At Recurly, we are very big fans of reducing the complexity for programmers — they should be focused on developing your service, not on edge cases of subscription billing.

But what about services doing usage-based, or metered, billing? The usage counter would traditionally be reset at the first of every month, hence the need to prorate to first month. Instead, what if the usage counter was simply reset when the subscription renewed? Bingo, problem solved.

So make your accountants, developers, and subscribers happy… keep it simple and forget about billing everyone on the first of the month.

Asking for a credit card number is a significant hurdle for most people. High fall off rates are to be expected. But once someone gives you a card number and starts a trial, they are more likely to convert to a paid subscriber at the end of the trial. So, if you are optimizing for your conversion numbers from trial to paid, then collect the credit card at the beginning of the trial.

If you offer a trial period and require your users to upgrade before the end of the trial, you will get more people in the door and trying your service. However, it’s very difficult to get someone to come back before the end of the trial to enter their card number. At least the number of total users will be much higher; use this as an opportunity to collect more feedback from your free users, especially the ones that declined to upgrade.

If you are able to offer your users an indefinite, free version, then you can wait to collect the credit card number when the user is ready to upgrade and convert to a paid subscriber. You benefit from getting the most people in the door and will have the most opportunities to ask the user to consider upgrading.

At the end of the day, you need to factor in the costs associated with the free trial, the viral-ity of your product, and the likeliness of a conversion when deciding when to collect their credit card number. You’ll get the highest retention rate when you can reach the customer the most (while providing value, not annoyance).